Pre-Money vs. Post-Money: An Overview
What's the difference between pre-money and post-money? The short answer to this question is that pre-money and post-money differ in timing of valuation. Both pre-money and post-money are valuation measures of companies and are crucial in determining how much a company is worth.
Pre-money valuation refers to the value of a company not including external funding or the latest round of funding. Pre-money is best described as how much a startup might be worth before it begins to receive any investments into the company. This valuation doesn't just give investors an idea of the current value of the business, but it also provides the value of each issued share.
On the other hand, post-money refers to how much the company is worth after it receives the money and investments into it. Post-money valuation includes outside financing or the latest capital injection. It is important to know which is being referred to, as they are critical concepts in the valuation of any company.
What’s The Difference Between Pre-Money And Post-Money?
Let's explain the difference using an example. Suppose an investor is looking to invest in a tech startup. The entrepreneur and the investor both agree the company is worth $1 million and the investor will put in $250,000.
The ownership percentages will depend on whether this is a $1 million pre-money or post-money valuation. If the $1 million valuation is pre-money, the company is valued at $1 million before the investment and after investment will be valued at $1.25 million. If the $1 million valuation takes into consideration the $250,000 investment, it is referred to as post-money.
As you can see, the valuation method used can affect the ownership percentages in a big way. This is due to the amount of value being placed on the company before investing. If a company is valued at $1 million, it is worth more if the valuation is pre-money than if it is post-money because the pre-money valuation does not include the $250,000 invested. While this ends up affecting the entrepreneur's ownership by a small percentage of 5 percent, it can represent millions of dollars if the company goes public.
The difference between pre-money and post-money gets very important in situations where an entrepreneur has a good idea but few assets.
In such cases, it's very hard to determine what the company is actually worth, and valuation becomes a subject of negotiation between the entrepreneur and the venture capitalist.
Calculating Post-Money Valuation
It's very easy to determine the post-money valuation. To do so, use this formula:
Post-Money Valuation = Investment Dollar Amount ÷ Percent Investor Receives
So if an investment is worth $3 million nets an investor 10%, the post-money valuation would be $30 million:
$3 million ÷ 10% = $30 million.
But, keep one thing in mind. This doesn't mean the company is valued at $30 million before getting a $3 million investment. Why? That's easy. That's because the balance sheet only shows an increase of $3 million worth of cash, therefore increasing its value by that same amount.
Calculating Pre-Money Valuation
Remember, the pre-money valuation of a company comes before it receives any funding. But this figure does give investors a picture of what the company would be valued at today. Calculating the pre-money valuation isn't difficult. But it does require one extra step—and that's only after you figure out the post-money valuation. Here's how you do it:
Pre-Money Valuation = Post-Money Valuation - Investment Amount
Let's use the example from above to demonstrate the pre-money valuation. In this case, the pre-money valuation is $27 million. That's because we subtract the investment amount from the post-money valuation. Using the formula above we calculate it as:
$30 million - $3 million = $27 million
Knowing the pre-money valuation of a company makes it easier to determine its per-share value. To do this, you'll need to do the following:
Per-Share Value = Pre-Money Valuation ÷ Total Number of Outstanding Shares
- Pre-money and post-money differ in timing of valuation.
- Pre-money valuation refers to the value of a company not including external funding or the latest round of funding.
- Post-money valuation includes outside financing or the latest capital injection. It is important to know which is being referred to, as they are critical concepts in valuation.